Research articles for the 2019-04-19

Are Actively Mutual Funds Per Se Imprudent Choices for 401(k) Plans?
Saha, Atanu,Roberts, Heather
Many corporations and financial institutions have recently faced lawsuits in which plaintiffs have alleged harm to 401(k) plan participants by the inclusion of high-fee actively managed mutual funds in plan offerings, instead of low-cost index funds. The goal of our study is to compare the performance of actively managed and passive index funds. Using a large dataset of more than 11,000 mutual funds, we find that, on average, actively managed funds do have higher fees than their index fund counterparts. However, a portfolio of active funds chosen based on certain key characteristics, such as low expense ratio, low turnover, high Sharpe ratio etc., have better net-of-fees returns than passive index funds in the categories of U.S. equity, international equity, fixed income, and mixed assets. The findings in our study imply that inclusion of a higher-fee active fund in a 401(k) plan does not necessarily imply an inferior or imprudent choice.

CEO Extraversion and the Cost of Equity Capital
Adebambo, Biljana,Bowen, Robert M.,Malhotra, Shavin,Zhu, Pengcheng
We examine whether CEO extraversion, an important personality trait associated with leadership, affects firms’ expected cost of equity capital. We measure CEO extraversion using CEOs’ speech patterns during the unscripted portion of conference calls. After controlling for several CEO and firm specific variables, we find a strong positive incremental association between CEO extraversion and firms’ expected cost of capital. In addition, we find that firms with relatively extraverted CEOs take more risk and enjoy higher organizational capital, each of which is associated with higher cost of equity capital. Firms with extraverted CEOs also exhibit lower valuations and lower equity issuance. These results are not driven by reverse causality, analyst optimism, or CEO entrenchment.

Capital Markets Union: An Action Plan of Unfinished Reforms
Gurdgiev, Constantin,Lyon, Tracy Lee,Cohen, Alexandra,Poda, Margaret,Salyer, Matthew
The European Union’s Capital Markets Union (CMU) is a broadly-based regulatory reforms framework that emerged from the Global Financial Crisis, the Great Recession and the Eurozone Sovereign Debt Crisis of 2008-2014. Launched in 2015, the CMU deployment date is set for 2019, although some aspects of the reforms have been implemented in 2016-2018.From the start, the CMU took aim at a series of structural bottlenecks exposed by the crises:1. Over the longer term, the CMU aims to deepen European capital markets by increasing cross-border finance and investment, and by attracting new capital from outside the European Union; and2. The CMU aims to broaden the investment markets by rebalancing investment funding channels available to European firms away from intermediated (or bank-issued) debt, toward equity and direct debt (bonds) funding.Our analysis covers the impact of the CMU, with a special focus on Small and Medium Enterprises (SME) finance since 2015. Using a range of data sources, we show that, to-date, the CMU has failed to deliver on the main twin objectives of increasing quality and quantity of funding accessible to the SME firms. Over time, the CMU has been morphing into a policy vehicle that simultaneously targets supports for the SME sector, while providing increased private financing for large-scale state- and EU-sponsored infrastructure projects. This undermines the CMU effectiveness in reducing the extent of the systemic risks build up and spillovers (contagion) in the financial sector.The lack of progress on the SME- and corporate investment-centric objectives, and the drift in European reforms away from the SME sector financing needs, are apparent in the specific aspects of the European Commission’s 2015 Action Plan and Strategic Plan 2016-2020. We argue that in recent years, the CMU core pillars (including the twin-objective of broadening and deepening SME finance and markets) have been displaced by reforms more favourable to the banking sector and to the larger financial institutions (e.g. pension and insurance funds).We propose refocusing of the CMU development and deployment in 2019 and onwards toward the original core objectives of the CMU, summarised in the bullet points above.

Delegation of Management Authority of the Board of Directors in Joint-Stock Companies in Turkey
Gürkaynak, Gönenç,Ermanlı Sakar, Selen,Üstüntaş, Büşra
Under Turkish corporate law, the board of directors is the authorized corporate body for the management of a joint-stock company. Nevertheless, delegation of such management authority may be a significant need for the board of directors at some point due to a number of reasons. Considering the foregoing practical need, the Turkish Commercial Code No. 6102, which is currently in force, allows delegation of the management authority to certain board member(s) and/or third person(s) under the certain conditions. In this regard, this paper delves into legal bases of the management and delegation concepts starting with structure of the board of directors besides opposing opinions under the Turkish corporate law doctrine and controversial issues in practice. The paper also aims to provide the professionals with the information as to implementation of the delegation concept.

Determinants and Impacts of Financial Literacy in the Lao PDR
Morgan, Peter,Trinh, Long Q.
However, internationally comparable information on financial literacy is still scarce. The Organisation for Economic Cooperation and Development International Network on Financial Education (OECD/INFE) survey of adult financial literacy is a standardized survey instrument, but so far has mainly been implemented in higher-income countries outside of Asia. Our paper extends the literature by conducting the survey in a relatively low-income Asian economy â€" the Lao PDR â€" and analyzing the determinants of financial literacy and the effects of financial literacy on other behaviors. We also compare these results with those of our earlier study of financial literacy in Cambodia and Viet Nam. This study of the Lao PDR extends our research in the Cambodia-Lao PDR-Myanmar-Viet Nam (CLMV) region, and the survey was broadened to include more variables that could be used as effective instrumental variables for financial literacy to deal with possible endogeneity problems. This increases our confidence in our findings that financial literacy positively affects both savings and financial inclusion.

Disclosure of Financial Statement Line Items and Insider Trading Around Earnings Announcements
Roh, Yongoh,Zarowin, Paul
This paper examines the relation between voluntary disclosure of financial statement line items accompanying, and insider trading around, quarterly earnings announcements. We find that investors’ reaction to positive earnings news is temporarily heightened by financial statement line items disclosed during earnings announcements. We show that managers, apparently aware of investors’ reaction, disclose more financial statement line items along with earnings and profitably trade shortly after earnings announcements. These results are more pronounced for CEO/CFO trades and opportunistic insider trades. Overall, our results are consistent with managers’ strategically disclosing line items to exploit the short-term return effect to their private benefit. We integrate three previously disparate phenomena â€" stock returns around earnings announcements, insider trading around earnings announcements, and voluntary disclosures around earnings announcements â€" into pieces of one mosaic.

Do Investors Actually Value Sustainability Indices? Replication, Development, and New Evidence on CSR Visibility
Durand, Rodolphe,Paugam, Luc,Stolowy, Hervé
In this paper, we replicate and expand Hawn, Chatterji, & Mitchell (2018) that used DJSI events to measure variations in firms’ CSR-activism and examined their effect on a firm’s stock price. We use DJSI events to capture variations in firms’ CSR visibility, holding CSR-activism constant by restricting our analyses to CSR-equivalent firms. First, we find similar results on stock price (i.e., no impact) and on trading volumes. Second, because professional market participants pay more attention to CSR-oriented firms and use visible cues such as DJSI- events, we study and find that additions to DJSI lead to more analysts following a firm, and that continuations on the DJSI lead to an increase in equity being held by long-term investors.

Do Minorities Pay More for Mortgages?
Bhutta, Neil,Hizmo, Aurel
We test for discrimination against minority borrowers in the prices charged by mortgage lenders. We construct a unique dataset of federally-guaranteed loans where we observe all three dimensions of a mortgage’s price: the interest rate, discount points, and fees. While we find statistically significant gaps by race and ethnicity in interest rates, these gaps are exactly offset by differences in discount points. We trace out point-rate price schedules and show that minorities and whites face identical schedules, but sort to different locations on the schedule. Such sorting likely reflects differences in liquidity or preferences, rather than lender steering. Indeed, we also provide evidence that lenders generate the same expected revenue from minorities and whites. Finally, we find no differences in total fees by race or ethnicity.

Does Short-Maturity Debt Discipline Managers? Evidence from Cash-Rich Firms' Acquisition Decisions
Huang, Qianqian,Jiang, Feng,Wu, Szu-Yin (Jennifer)
We study the disciplinary role of short-maturity debt in cash-rich firms. We report evidence that such debt mitigates cash-rich firms' overinvestment in acquisitions. The disciplinary role is mostly concentrated among cash-rich firms that are weakly governed and have limited access to the public debt market and is also more pronounced for cash-rich firms that operate in less competitive industries. Furthermore, for cash-rich acquirers, high levels of short-maturity debt are associated with higher acquisition announcement returns and better post-acquisition operating performance. Overall, our results highlight the effective role of short-maturity debt in reducing agency cost.

Establishment of the Credit Risk Database: Concrete Use to Evaluate the Creditworthiness of SMEs
Kuwahara, Satoshi,Yoshino, Naoyuki,Sagara, Megumi,Taghizadeh-Hesary, Farhad
The credit risk database (CRD) makes it possible to mitigate the problem of information asymmetry between small and medium-sized enterprises (SMEs) and financial institutions and contributes to improving SMEs’ access to finance by collecting a large number of financial statements through the mechanism of SME finances and establishing a robust statistical model. We use the CRD in Japan, confirm the situation in Japan, and highlight the CRD’s contribution to evaluating the creditworthiness of SMEs. We also explain how to establish the CRD as a financial infrastructure, while indicating that the CRD and the scoring model based on it have maintained their quality owing to their operating system. We hope our experience contributes to the introduction of a statistical credit risk database composed of a large number of anonymous financial statement data in other countries and that the CRD helps to improve SMEs’ access to finance as a financial infrastructure.

Experimental Marketing in Hotel Operations
Vardari, Dr.Sc. Luan,Arapi, Dena
Throughout 21’st century, marketing managers, brand managers, marketing academics have adopted the classic marketing discipline. This approach has defined consumers as rational decision-making, benefit-focused individuals. Today’s consumer, however, has become more emotional decision-making individuals than rational decision-making individuals. Consumers are not only concerned with the functional value of the product or service they provide to them, but they also deal with the pleasant feelings they have created and the additional value they create in their memory. In modern marketing, businesses are trying to establish this additional value by creating “experience” for their customers.Due to the humanity-based nature of the tourism industry, consumer behavior has an important place in tourism marketing. The analysis of consumer behavior in tourism is only possible with the meaning of the product or service carried by the tourists and by determining the factors that are effective in making the holiday purchase decision. Along with the change of economic presentation, the process from consumer to service, from service towards experiment, has revealed the concept of experiential marketing.Tourism products and services, personalization and experience to have the quality of experience in terms of experience in the economy is are ahead in the race. This will provide an important advantage in creating customer loyalty if it is guided and managed by hotel and accommodation operators correctly.

Fair Pensions
Boelaars, Ilja,Broeders, Dirk
This paper examines the allocation of market risk in a general class of collective pension arrangements: Collective Defined Contribution (CDC) schemes. In a CDC scheme participants collectively share funding risk through benefit level adjustments. There is a concern that, if not well designed, CDC schemes are unfair and will lead to an unintended redistribution of wealth between participants and, in particular, between generations. We define a pension scheme as fair if all participants receive an arbitrage-free return on the market risk they bear. The fact that the participants' claim on the CDC schemes' collective assets is expressed in terms of a stochastic future benefit, makes the arbitrage-free allocation of market risk non-trivial. It depends crucially on the specification of the discount rate process in combination with the benefit adjustment process. We show that fair CDC schemes may use a default-free market interest rate in combination with a specific horizon-dependent benefit adjustment process. Alternative discount rates are also permissible, but require additional correction terms in the benefit adjustment process.

Fixed Income ETFs and Bond Liquidity
Marta, Thomas
I investigate the impact of fixed income Exchange-Traded Funds (ETFs) on corporate bond liquidity. Exploiting two distinct quasi-natural experiments of exogenous changes in ETF eligibility, I find that bonds joining (exiting) ETFs experience a liquidity improvement (deterioration) compared to similar bonds whose ETF ownership stays stable. My findings imply a positive effect of ETFs on their corporate bond liquidity, supporting the theoretical prediction that ETFs constitute a liquidity buffer.

Institutional Cross-Ownership, Motivated Investors, and Firm Value: Evidence from Real Estate Investment Trusts
Ling, David C.,Wang, Chongyu,Zhou, Tingyu
This paper contributes to the ongoing debate about whether and how institutional cross-ownership (ICO) affects firm behavior. We examine the impact of ICO on firm value using a sample of equity REITs, which provide significant advantages for isolating a monitoring channel. Using different measures of ICO, alternative proxies for firm value and controlling for a variety of firm characteristics as well as fixed effects, we find a robust and positive relationship between ICO and REIT firm value. Next, we measure ICO separately for motivated and non-motivated investors to accurately capture the full range of investor influence and characteristics, including their monitoring of REIT investment decisions. We find that it is the motivated investors that drive the positive relationship between ICO and firm value. The positive relation between ICO and firm value is even stronger when we construct our ICO measures using blockholdings. Our difference-in-difference (DID) analysis using mergers among between financial institutional investors establishes a causal relation between ICO and firm value. Lastly, we find that geographic diversification enhances firm value when REITs have higher ICO, confirming the monitoring role of institutional cross-holders.

Legal Theory of Finance: Evidence From Global Financial Networks
Sarpong, Prince,Deodutt, Jugjith
Katharina Pistor proposed the Legal Theory of Finance (LTF), based on the premise that finance is legally constructed (Pistor, 2013b). In this paper, we apply network science to provide empirical evidence from global financial networks (GFN) to support the argument of the LFT. Using data from the World Bank and IMF, we confirm that the GFN is indeed hierarchical. We also show that the depth of interconnectedness in the GFN is increasing. The United States is the most important node in the GFN but temporarily lost its position to the United Kingdom in 2008. This paper shows that the most important node in the GFN can temporarily shift during major global financial events. The United Kingdom has also lost its position in the GFN to Switzerland on several measures of centrality. We further confirm that there is no evidence of a flattening of the GFN. Although some emerging economies have improved significantly in terms of GDP and international reserves, these improvements have not reflected in their positions in the GFN. We propose that the approach to regulating the global financial system should focus on more stringent rules for the most central countries in the GFN. This could be more effective in ensuring stability in the global financial system.

Management Forecasts and Competition for Limited Investor Resources
Park, Stella Y.,Schrand, Catherine M.,Zhou, Frank
This paper documents a dual role for disclosure. In addition to the traditional role of alleviating information asymmetry, firms are motivated to disclose to attract limited investor resources and order flow away from other firms (Fishman and Hagerty, 1989). Higher competition for investors increases the incentive to disclose, but the resulting excessive disclosure implies diminishing marginal returns to disclosure. Consistent with this investor-seeking role for disclosure, we find that when firms compete more for investors, they issue more guidance, especially capital expenditure forecasts. The guidance increases liquidity and price efficiency, but the effects decrease as guidance serves more of an investor-seeking role.

Mutual Fund Returns and Their Characteristics: A Novel Approach to Picking Better Performing Actively Managed Funds
Malkiel, Burton G.,Saha, Atanu
Using a survivorship bias-free dataset set of over 4,300 U.S. equity and international equity funds for the period 2000-2018, we examine whether funds chosen based on various fund characteristics in a given year can yield superior performance the following year. We find that a portfolio of funds chosen based on the combination of characteristics of lowest expense ratio, and lowest turnover and highest Sharpe ratio, generates considerably better future performance than the average actively managed fund and the difference in returns is statistically significant. Interestingly, we are unable to confirm the conventional wisdom that the size of a fund or past recent fund cashflows are important drags on portfolio performance.

Stylized Facts on Price Formation on Corporate Bonds and Best Execution Analysis
Guo, Xin,Lehalle, Charles‐Albert,Xu, Renyuan
The goal of this paper is to establish a benchmark for transaction cost analysis in bond trading for retail investors. Investors can use this benchmark to improve decisions when requesting quotes from dealers on electronic platforms. This benchmark is constructed in two steps. The first step is to identify abnormal trades by approximating the market liquidity using different statistical regression methods: OLS, two-step LASSO and Elastic Net. The second step is to estimate the amplitude and the decay pattern of price impact using non-parametric methods. A key discovery is the price impact asymmetry between customer-buy orders and costumer sell orders: customer buy orders have a larger price impact than customer sell orders. We show that this asymmetry is statistically significant.

The Disclosure Function of the U.S. Patent System: Evidence from the PTDL Program and Extreme Snowfall
Martens, Tim
Can firms use the U.S. patent system to communicate with the financial market? This study uses variation in local patent information availability to identify local changes in trading volume in reaction to the release of a patent. The variation comes from changes in the geographic location of U.S. Patent and Trademark Depository Libraries over time. I find a strong increase in the local trading volume of stocks after the release of a patent in counties that have access to patent information. The effect is stronger for high value information and for investors that are closer to the information. Finally, the association breaks down on days with extreme snowfall, indicating a direct patent information transfer between the U.S. Patent and Trademark Office and the financial market.

The European Central Bank’s Intricate Independence Versus Accountability Conundrum in the Post-Crisis Governance Framework
Amtenbrink, Fabian
In the wake of the European financial and sovereign debt crisis there is a revived interest in the constitutional position of the European Central Bank (ECB) in the European Union legal order, notably its independence and democratic legitimacy. A new generation of researchers, witnessing and in part affected by the course of events during the crisis, is currently discovering this field of research. These contemporary contributions are more than reiterations of debates at the time of the establishment of the European System of Central Banks. Indeed, the (legal) landscape pertaining to the position of the ECB has transformed significantly during the crisis, not only raising concerns about the legitimacy of the position and actions of the ECB, but, somewhat paradoxically, also about the compatibility of its functions and actions with the basic EU Treaty preference for an independent, inflation-averse and thus, conservative central bank. This contribution provides a broader picture of the independence-versus-accountability conundrum in the post-crisis governance framework by discussing main determinants of the independence and democratic legitimacy of the ECB today, as well as identifying risks emanating from the ECB’s position in the EU legal order. Based on this assessment areas of improvement are identified.

The Impact of Microfinance Institutions (MFI) on Small and Medium Enterprises (SME) in Kosovo
Tasha, Njomza,Vardari, Dr.Sc. Luan,Arapi, Dena
Small and medium enterprises are the key factors in the economy of a country. Their good development means that there are bigger chances of employment and economic development of a country. In the other side microfinance institutions of- fer services like loan and lecture programs to the individuals and businesses with lower incomes and for those rural. Small and medium enterprises are interconnect- ed with microfinance institutions since the latest provide a great financial help to these businesses, the opportunity to meet their debts and other obligations. We have to consider that the main goal of microfinance institutions is to help small and me- dium businesses.Then, we have to emphasize that the main goal of this work is:- The review and presentation of the importance of small and medium enterprises;- The impact of microfinance institutions on SME’s;- Reasons and purposes of microfinance institutions help.Our survey is based on the literature, publications and articles. Also, we are going to do questionnaires for small and medium businesses. In this survey, we are going to use analytical and descriptive methods. As a conclusion, we can conclude that the microfinance institutions have a great impact on small and medium enterprises.

The Role of Credit Guarantee Schemes in the Development of Small and Medium-Sized Enterprises with an Emphasis on Knowledge-Based Enterprises
Taghizadeh-Hesary, Farhad
Small and medium-sized enterprises (SMEs) in their growth stage reach the point where, on the one hand, personal resources do not meet their needs, and, on the other, they do not have enough collateral to attract external finance. Access to finance can be facilitated by obtaining loans from financial institutions backed by governmental credit guarantees. Therefore, the development of a sound credit guarantee scheme will be an important step in filling the financing gap of SMEs.We investigate the situation of the credit guarantee scheme for SMEs in Iran by using the available data and interviews with activists from this field with the grounded theory method. We show the weaknesses of the Iranian credit guarantee scheme, and based on the analysis, present solutions and policy recommendations in accordance with the social and economic environment of the Islamic Republic of Iran. The most important problem is the lack of a credit database for comprehensive assessment of SMEs, especially knowledge-based enterprises. The lack of a robust database makes it impossible to carry out a comprehensive evaluation because these models require a large amount of data. The lack of accurate models makes it difficult to rate credit status and thus to issue credit guarantees. In addition, the current level of the capital of the credit guarantee funds in Iran is not sufficient given the large number of SMEs in the country.